Understanding the Basic Differences Between Chapter 7 and Chapter 13

Bankruptcy is hardly anyone’s favorite option when dealing with difficult financial situations, but in some cases, it is the only viable route. Debt.org reports that bankruptcy patterns have shown a marked increase from 1980 – 2005. While they have decreased slightly, one out of every 50 households will file bankruptcy within a year on average. Total Bankruptcy states that typically Chapter 7 is more popular than Chapter 13, but in certain cases, Chapter 13 is the better choice. It’s important to understand the basic distinctions between the two so that you can make an informed choice.

Chapter 7 Bankruptcy

Chapter 7 is also known as a liquidation bankruptcy, which means that it will go through and eliminate all your general unsecured debts. Most of the time, this option is available to individuals with limited to no disposable income or who are in particularly stringent circumstances. It eliminates credit card debt as well as medical bills. However, it will not remove other debts such as taxes and student loans in most cases. You may have to liquidate certain assets as well. Whether you must sell your home depends on whether your home qualifies as exempt equity, which will depend in part on your state of residence and other assets.

The bankruptcy courts follow a stricter set of guidelines as of 2005 in determining whether you qualify. If you have sufficient disposable income to be better suited for Chapter 13 bankruptcy, the suit will be dismissed.

Chapter 13 Bankruptcy

Chapter 13 is known as reorganization bankruptcy. This form of bankruptcy is easier to get and is designed to allow debtors to pay back some portion at least of their debts. It doesn’t liquidate the debts so much as it allows you to create space and develop a better plan. Under this form of bankruptcy, you are allowed to keep all of your property, even if they were nonexempt assets. However, you must put together a plan for paying back all or most of your debts throughout the course of a set period. Chapter 13 bankruptcy tends to be used for individuals who got behind on monthly mortgage payments and the like. It gives them breathing room and prevents foreclosure from moving forward.

Bankruptcy courts are more lenient about granting Chapter 13 bankruptcy suits because they do not result in the debt being fully discharged. Even so, you must demonstrate adherence to the guidelines and participate with all the steps that the court lays out.

Declaring bankruptcy doesn’t necessarily mean that you have to sell everything, nor does it mean that all of your debts will be discharged. It depends both on your situation and the kind of bankruptcy you file for. The two most common forms are Chapter 7 and Chapter 13. It’s important that you choose the right one, and both are such that you would benefit from professional advice. You may want to consider talking with an attorney at Van Horn Law Group to guide you out of the mess.

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Chad Van Horn

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